Dec 14 -
Summary analysis -- Standard Pacific Corp. ------------------------ 14-Dec-2012
CREDIT RATING: B+/Stable/-- Country: United States
Primary SIC: Residential
Mult. CUSIP6: 85375C
Mult. CUSIP6: 853763
Mult. CUSIP6: 853766
Credit Rating History:
Local currency Foreign currency
07-Dec-2010 B+/-- B+/--
26-Mar-2010 B/-- B/--
10-Sep-2009 CCC+/-- CCC+/--
04-Mar-2009 CCC/-- CCC/--
16-May-2008 B-/-- B-/--
15-Feb-2008 B+/-- B+/--
Standard & Poor's Ratings Services' ratings on Standard Pacific Corp. reflect the company's "aggressive" financial risk profile, as measured by elevated leverage metrics and low interest coverage, though near-term debt maturities are modest and liquidity is adequate. We consider the company's business risk profile to be "weak" due to an improving but fragile housing environment.
Standard Pacific is the eighth-largest public homebuilder in the U.S. by revenue, as it delivered 3,100 homes during the trailing-12-months ended Sept. 30, 2012. The company primarily focuses on the move-up (roughly three-quarters of deliveries) and entry-level (roughly one-quarter of deliveries) homebuyer segments, and the average selling price (ASP) was $369,000 in the third quarter of 2012. Standard Pacific is currently active in 24 markets in seven states, but is heavily concentrated in California, where it derived more than 55% of its revenue year-to-date through third-quarter 2012.
Standard Pacific's homebuilding operations reported continued momentum through the third quarter of 2012 (like most public builders) due to a relatively stronger homebuilding market, particularly in its core California and southwest markets. The company has now generated a net profit in each of the last four quarters. Profitability in the third quarter was driven by a 32% year-over-year increase in sales absorption on a 2% drop in community count. The average sales price on homes delivered during the quarter also grew by 7% over the prior year to $369,000, reflecting a greater mix of move-up buyers and some modest pricing power. Average sales prices were up in all regions, but the greatest gains came outside of the company's core California market (Texas, Colorado, and Florida experienced double digit increases). Base prices increased in 85 of the 156 communities and incentives have fallen to 5.3% of revenue from 8.1% a year ago. As a result, homebuilding gross margins (before capitalized interest) grew 210 basis points year-over-year to 28.7% in the third quarter and remain the highest among the builders we rate.
Standard Pacific pivoted to a more aggressive land acquisition and development strategy early in the current cycle, with more than $1.3 billion in total land spend since the start of 2009. The company's current land strategy remains aggressive and it invested $207 million to acquire roughly 3,500 lots in the third quarter of 2012, the bulk of which were located in the San Diego market. It now plans to invest $600 million to $700 million for the full-year 2012, putting fourth quarter spending in the $150 million-$250 million range. The majority of land acquired is raw or partially developed (84% year-to-date) and the company deployed more than half of the capital in California (59% year-to-date). We believe land investment will remain robust in 2013 (but largely discretionary) and likely exceed 2012, to the extent that sales absorption keeps pace.
The company has expanded its selling platform and has grown its community count as a result of its early cycle land investment strategy. The number of average selling communities has steadily increased since the end of 2009, but was roughly flat the previous two quarters and will realize only modest growth in 2013 despite continued land acquisitions. This is due to a number of factors. Land investments that the company made early in the cycle consisted mostly of finished and ready-to-build lots, while more recent purchases of raw or semi-developed lots will require a greater level of development prior to community openings, and greater-than-expected sales absorption is causing faster community close-outs. As a result, revenue growth in 2013 will largely require further improvement in sales absorption and/or higher average selling prices.
Standard Pacific's balance sheet leverage has fallen over the past year due to improved profitability and EBITDA generation. However, leverage remains aggressive with homebuilding debt-to-EBITDA at roughly 10.0x (on a trailing-12-month basis) and debt-to-total capitalization at 68% as of Sept. 30, 2012. The decline in leverage was also muted and will likely fall short of our initial 2012 forecasts due to the additional debt from the $253 million issuance of 1.25% senior convertible notes in the third quarter of 2012. The company also raised $72 million of net proceeds from a concurrent common stock offering. Proceeds from the offerings boosted liquidity, which will be used to fund future land investment. We now expect debt-to-EBITDA to end 2012 at closer to 9x (up from our previous forecast of 8x) and EBITDA to cover interest by 1.4x.
Standard Pacific's liquidity is adequate, in our opinion, as the company has sufficient cash to meet estimated obligations over the next 12 months.
We based our liquidity assessment on the following factors:
-- We expect the company's liquidity sources (including cash, marketable securities, EBITDA, and revolver availability) over the next 12 months to exceed its uses by greater than 1.2x when accounting for discretionary land purchases;
-- The company has no remaining debt maturities through 2013, following the repayment of $40 million of convertible notes in October 2012; and
-- Even if EBITDA declines by 30%, net sources would comfortably exceed nondiscretionary cash requirements over the next 12 months.
The company's sources of liquidity at Sept. 30, 2012, included $474 million of unrestricted homebuilding cash, an estimated $210 million to $230 million of adjusted-EBITDA over the next year, and full availability under a recently amended $350 million revolving credit facility.
The previous credit facility was increased to $350 million from $210 million and also expanded covenant headroom to allow full use of both the company's cash liquidity and revolver availability. Covenants under the new revolving credit facility now require the company to meet an interest coverage ratio greater than 1.0x (down from 1.25x under the previous agreement) and eliminated the minimum liquidity covenant under the previous facility. The required interest coverage ratio will increase to 1.25x at March 31, 2014. Failure to meet the interest coverage covenant would not constitute an event of default under the credit agreement, but may reduce borrowing availability under the revolver. We view Standard Pacific's liquidity to be improved given the increased size and availability (given the greater covenant headroom) under the new revolving credit agreement.
Identified uses of cash at Sept. 30, 2012, included roughly $40 million in debt maturities (repaid in October 2012), $118 million of cash interest per year, and discretionary land investments projected to exceed $600 million to $700 million guided for 2012.
Our rating on the company's senior unsecured notes is 'B', which is one notch below the corporate credit rating on Standard Pacific. The recovery rating on these notes is '5', indicating our expectation that lenders would receive modest (10%-30%) recovery in the event of default. Our rating on the company's senior subordinated notes is 'B-', which is two notches below the corporate credit rating on Standard Pacific. The recovery rating on these notes is '6', indicating our expectation that lenders would receive negligible (0%-10%) recovery in the event of default. For the latest recovery analysis, please see the recovery report on Standard Pacific published on RatingsDirect on Aug. 2, 2012.
The stable outlook reflects our expectation that Standard Pacific will continue to deleverage through sustained profitability given its presence in the relatively stronger California and southwest homebuilding markets. We could consider positive ratings momentum if profitability strengthens faster than expected such that debt-to-EBITDA declines closer to 6x and liquidity remains adequate. We would lower our rating by one or more notches over the next 12 months if the housing market takes another sharp downward turn, profitability weakens materially, and liquidity becomes less than adequate.